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Relational Contracts and the Theory of the FirmGeorge P. BakerHBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER) Robert S. GibbonsMassachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER) Kevin J. MurphyUniversity of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law December 29, 1997 Abstract: We combine Simon's conception of relational contracts with Grossman and Hart's focus on asset ownership. We analyze whether transactions should occur under vertical integration or non-integration, and with or without self-enforcing relational contracts. These four models allow us to re-run the horse race Coase proposed between markets and firms as alternative governance structures, but with four horses rather than two. We find that efficient ownership patterns are determined in part by the relational contracts that ownership facilitates, that vertical integration is an efficient response to widely varying supply prices, and that high-powered incentives create bigger reneging temptations under integration than under non-integration. Note: this paper was formerly titled "Implicit Contracts and the Theory of the Firm"
Number of Pages in PDF File: 41 JEL Classification: D21, D23, D81, D82 working papers seriesDate posted: May 11, 1997Suggested CitationContact Information
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